During the recent financial crisis, the interest rates and the yield curves have been frequently changing. The Bank of England offers access to the most recent yield curves as well as to the archived data on interest rates in the past, see http://www.bankofengland.co.uk, and in particularhttp://www.bankofengland.co.uk/statistics/pages/yieldcurve/default.aspx.
By using the relevant data, theoretical concepts and models, answer the following three questions:
1) What is the term structure of interest rates? Construct the yield curves in the UK for the end of each quarter in the last five years. You can use the “surface” chart type in Excel, or a similar 3D representation. Describe financial instruments used for your yield curves. How is the interest rate on those financial instruments calculated?
(40% of the total mark)
2) Based on the theories of the term structure, explain the shapes and changes in the yield curve you observe. What can you say about the behaviour of the liquidity premium in this period?
(40% of the total mark)
3) Calculate the coefficient of correlation between yields on the instruments with the shortest and the longest maturity in your sample. Would you expect it to be lower or higher than that between assets with the medium-term and the longest maturity? Why?
(20% of the total mark)
Total word count: not more than 1950.
OBS- i will send some material and the excel sheet of constructed 3d graph so would use it and answer all question based on it . AND I PUT THE PERCENT OF EACH SO YOU CAN SEE HOW IMPORTANT EACH ONE OF THEM , BUT DONT WANT BIG SENTENCES PLEASE EACH QUESTION THE COURSEWORK SHOULD BE NO MORE THAN 1950 WORDS
the REFERENCE BOOKS AND ESSENTIAL READING SHOULD BE THESE ONE
Mishkin F., The Economics of Money, Banking and Financial Markets, 10th Edition, 2012, Pearson.
You may find the following publications useful for your understanding of the most recent developments in the theories of the term structure of interest rates.
Greenwood, R., D. Vayanos (2010) “Price Pressure in the Government Bond Market,” The American
Economic Review, 100, Papers and Proceedings, pp. 585-590
Gürkaynak, R., J. Wright (2012) “Macroeconomics and the Term Structure,” Journal of Economic
Literature, 50, pp. 331-367
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